Morningstar DBRS Finalises Provisional Credit Ratings on Quarzo S.r.l. - Series 2024-1

DBRS Ratings GmbH (Morningstar DBRS) finalised the provisional credit ratings on the following classes of notes (collectively, the Rated Notes) issued by Quarzo S.r.l. - Series 2024-1 (the Issuer):

-- Series A1 Notes at AA (high) (sf)
-- Series A2 Notes at AA (high) (sf)
-- Series B Notes at AA (sf)
-- Series C Notes at A (high) (sf)
-- Series D Notes at A (sf)

Morningstar DBRS did not rate the Series J and Series R Notes (together with the Rated Notes, the Notes) also issued in the transaction.

The credit ratings of the Series A1 and Series A2 Notes (collectively, the Series A Notes) address the timely payment of scheduled interest and the ultimate repayment of principal on or before the legal final maturity date. The credit ratings of the Series B, Series C and Series D Notes address the ultimate payment of interest but the timely payment of scheduled interest when they become the senior-most tranche and the ultimate repayment of principal on or before the legal final maturity date.

The Notes are backed by a portfolio of fixed-rate unsecured consumer loans granted by Compass Banca S.p.A. (Compass, the originator) to private individuals residing in Italy for the purchase of new and used vehicles, personal consumption and other purposes. Compass is also the initial servicer.

CREDIT RATING RATIONALE
The credit ratings are based on the following analytical considerations:
-- The transaction's structure, including the form and sufficiency of available credit enhancement to withstand stressed cash flow assumptions and repay the Issuer's financial obligations according to the terms under which the Rated Notes are issued;
-- The credit quality and the diversification of the collateral portfolio, its historical performance and the projected performance under various stress scenarios;
-- The operational risk review of Compass with regard to its originations, underwriting, servicing and financial strength;
-- The transaction parties' financial strength with regard to their respective roles;
-- The Morningstar DBRS sovereign credit rating on the Republic of Italy, currently at BBB (high) with a Stable trend; and
-- The consistency of the transaction's structure with Morningstar DBRS "Legal Criteria for European Structured Finance Transactions" and "Derivative Criteria for European Structured Finance Transactions" methodologies.

TRANSACTION STRUCTURE
The transaction includes a scheduled six-month revolving period. During the revolving period, the originator may offer additional receivables that the Issuer will purchase, provided that the loan eligibility criteria and concentration limits set out in the transaction documents are satisfied. The revolving period may end earlier than scheduled if certain events occur such as the originator's insolvency, the servicer's replacement or the breach of certain performance triggers.

The transaction allocates collections through a combined priority of payments and benefits from a cash reserve initially funded at closing with a subordinated loan from the originator. The cash reserve will amortise to a target amount equal to 1.3% of the outstanding principal balance of the Rated Notes without a floor and can be used to cover senior expenses, senior swap costs and interest payments on the Rated Notes.

At the end of the scheduled revolving period, the Rated Notes together with the Series J Notes will be redeemed pro rata based on the relative tranche thickness at closing (i.e., 86.0%, 5.0%, 3.5%, 2.8% and 2.7% for Series A, Series B, Series C, Series D and Series J Notes, respectively) until a sequential redemption event occurs, after which the non-reversible, fully sequential redemption of the Notes will start.

The interest rate risk for the transaction is considered limited as an interest rate swap is in place to reduce the mismatch between the fixed-rate collateral and the floating-rate Rated Notes.

TRANSACTION COUNTERPARTIES
Mediobanca Banca di Credito Finanziario S.p.A. (Mediobanca) and Citibank N.A. (Milan Branch) are the account banks for the transaction. Morningstar DBRS has a private credit rating on Mediobanca and a Long-Term Issuer Rating of AA (low) on Citibank N.A. Morningstar DBRS conducted further analysis on the exposure to the account banks based on the downgrade rating thresholds of BBB (high) in the transaction documents.

Crédit Agricole Corporate and Investment Bank (CA-CIB) is the initial swap counterparty for the transaction. The Morningstar DBRS private rating on CA-CIB meets the criteria to act in such capacity. The transaction documents contain downgrade provisions consistent with Morningstar DBRS criteria.

PORTFOLIO ASSUMPTIONS
As the originator has a long operating history of consumer and auto loan lending in Italy, Morningstar DBRS considers the performance data to be meaningful for detailed vintage analysis. Morningstar DBRS maintained its expected defaults for each loan type and constructed an updated portfolio-level lifetime expected default of 4.3% based on the potential portfolio migration during the scheduled revolving period. Additionally, Morningstar DBRS updated the expected recovery for each loan type and determined a portfolio-level expected recovery of 25%.

Morningstar DBRS credit ratings on the Rated Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the Rated Notes are the related Interest Amounts and the Initial Principal Amount.

Morningstar DBRS credit ratings do not address non-payment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

Morningstar DBRS long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the "Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings" at https://dbrs.morningstar.com/research/427030.

Morningstar DBRS analysed the transaction structure in Intex Dealmaker.

Notes:
All figures are in euros unless otherwise noted.

The principal methodology applicable to the credit ratings is "Rating European Consumer and Commercial Asset-Backed Securitisations" (8 January 2024), https://dbrs.morningstar.com/research/426219.

Other methodologies referenced in this transaction are listed at the end of this press release.

Morningstar DBRS has applied the principal methodology consistently and conducted a review of the transaction in accordance with the principal methodology.

An asset and a cash flow analysis were both conducted. Due to the inclusion of a revolving period in the transaction, the analysis considers potential portfolio migration based on the replenishment criteria set forth in the transaction legal documents.

For a more detailed discussion of the sovereign risk impact on Structured Finance credit ratings, please refer to "Appendix C: The Impact of Sovereign Ratings on Other DBRS Morningstar Credit Ratings" of the "Global Methodology for Rating Sovereign Governments" at: https://dbrs.morningstar.com/research/421590.

The sources of data and information used for these credit ratings are received from the originator through the arranger Mediobanca and include the following, further split by loan type:
-- Static quarterly default data from Q1 2009 to Q4 2023;
-- Static quarterly recovery data from Q1 2009 to Q4 2023;
-- Static quarterly prepayments data from Q1 2009 to Q1 2024;
-- Dynamic quarterly prepayment data from Q1 2009 to Q1 2024; and
-- Dynamic quarterly delinquency data from Q1 2009 to Q1 2024.

Morningstar DBRS also received a set of stratification tables for the loan pool as of 27 May 2024 and its related contractual amortisation profile.

Morningstar DBRS did not rely upon third-party due diligence in order to conduct its analysis.

Morningstar DBRS was supplied with third-party assessments. However, this did not impact the credit rating analysis.

Morningstar DBRS considers the data and information available to it for the purposes of providing these credit ratings to be of satisfactory quality.

Morningstar DBRS does not audit or independently verify the data or information it receives in connection with the credit rating process.

These credit ratings concern newly issued financial instruments. These are the first Morningstar DBRS credit ratings on these financial instruments.

This is the first rating action since the Initial Credit Rating Date.
Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com.

Sensitivity Analysis: To assess the impact of changing the transaction parameters on the credit ratings, Morningstar DBRS considered the following stress scenarios as compared with the parameters used to determine the credit ratings:

-- Expected default of 4.3%: a 25% and 50% increase in the expected default.
-- Expected recovery of 25% or loss given default (LGD) of 75%: a 25% increase in the expected LGD.

Scenario 1: A 25% increase in the expected default.
Scenario 2: A 50% increase in the expected default.
Scenario 3: A 25% increase in the expected LGD.
Scenario 4: A 25% increase in the expected default and 25% increase in the expected LGD.
Scenario 5: A 50% increase in the expected default and 25% increase in the expected LGD.

Morningstar DBRS concludes that the expected credit ratings under the five stress scenarios are as follows:
-- Series A Notes: AA (sf), AA (low) (sf), AA (sf), AA (low) (sf), A (sf)
-- Series B Notes: AA (low) (sf), A (sf), A (high) (sf), A (low) (sf), BBB (high) (sf)
-- Series C Notes: A (sf), A (low) (sf), A (low) (sf), BBB (sf), BBB (low) (sf)
-- Series D Notes: BBB (high) (sf), BBB (sf), BBB (high) (sf), BBB (low) (sf), BB (high) (sf)

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS historical default rates may be published by the Financial Conduct Authority (FCA) in a central repository: https://data.fca.org.uk/#/ceres/craStats.

These credit ratings are endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Daniele Canestrari, Assistant Vice President
Credit Rating Committee Chair: David Lautier, Senior Vice President
Initial Credit Rating Date: 31 May 2024

DBRS Ratings GmbH
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60311 Frankfurt am Main Deutschland
Tel. +49 (69) 8088 3500
Geschäftsführer: Detlef Scholz
Amtsgericht Frankfurt am Main, HRB 110259

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Rating European Consumer and Commercial Asset Backed Securitisations (8 January 2024),
https://dbrs.morningstar.com/research/426219.
-- Rating European Structured Finance Transactions Methodology (11 December 2023),
https://dbrs.morningstar.com/research/425149.
-- Legal Criteria for European Structured Finance Transactions (30 June 2023), https://dbrs.morningstar.com/research/416730.
-- Operational Risk Assessment for European Structured Finance Originators (7 March 2024),
https://dbrs.morningstar.com/research/429054.
-- Operational Risk Assessment for European Structured Finance Servicers (15 September 2023),
https://dbrs.morningstar.com/research/420572.
-- Interest Rate Stresses for European Structured Finance Transactions (15 September 2023),
https://dbrs.morningstar.com/research/420602.
-- Derivative Criteria for European Structured Finance Transactions (18 September 2023),
https://dbrs.morningstar.com/research/420754.
-- Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (23 January 2024),
https://dbrs.morningstar.com/research/427030.

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/278375.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].